Once the Sectional Titles Schemes Management Act is in force, body corporates will be obliged to provide both for the operational as well as the future expenses of the scheme.

However, they also have to ensure that the levies, and any increases, are not prohibitive.

Martin Bester, managing director of Intersect Sectional Title Services says that currently, the Sectional Titles Act requires the body corporate to establish a fund “sufficient in the opinion of the body corporate for the repair, upkeep, control, management and administration of the common property (including reasonable provision for future maintenance and repairs)”.

However, in Bester’s opinion the latter part of the above statement is relative and vague and he wonders what constitutes as reasonable.

He says that at Intersect they have advocated the establishment of a reserve or sinking fund for years, as they believe this to be good practice. “Now, several years on in certain cases, we are able to fund certain repairs and or maintenance items without impacting on ordinary levies and without requiring special levies or, at least, reducing the quantum of same.”

At some stage the Sectional Titles Schemes Management Act (STSMA) will be enforced and, essentially, replaces the management aspects of the Sectional Titles Act – which will all be repealed – with a more user friendly and simpler format.

Section 3 of the STSMA differentiates between an ‘administration’ and a ‘reserve’ fund. The latter providing “to establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the Minister”.

According to Bester, what amounts the Minister may prescribe is yet to be seen, but once the STSMA is in force, body corporates will be obliged to provide both for the operational as well as the future expenses of the scheme.

He says now is a good time for trustees to be considering the reserve or sinking fund as it will become prescribed. Bester says that he is often asked how much should be in a reserve or sinking fund and says no benchmark and no crystal ball exists. “So in the absence of both, Intersect suggests to our clients that foreseen major repairs and or maintenance expenses, such as repainting, be priced at current rates and escalated by a time factor.”

Bester says this will indicate the quantum of the resources that will be required in the future at a specific point in time and will be good starting point for calculating how best to achieve it. He says the fund should, at any point in time, be able to cope with at least 20 percent of annual expenses so as to deal with the unforeseen expenses or reasonable contingencies.

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It is best to attend the meetings, make your voice heard and play a role in what is a very important financial and lifestyle asset to owners.

Andrew Schaefer, managing director of the Trafalgar Group, warns that this could be a big mistake.

“Attending the AGM is the sectional title owners’ only real chance of influencing how their scheme is run,” he says.

The decisions made at an AGM directly affect the owners’ lifestyles and finances, so it’s worth the time taken to attend and take part in these decisions.

Most serious disputes in schemes are about money, says Schaefer. The AGM is where members get the chance to hear how their money is being spent. Approval of the budget for the coming year is another critical point of discussion. At the AGM, members have the opportunity to discuss, and have explained to them, if necessary, how their money was spent, and if any special levies are likely to be necessary.

Another point of dissatisfaction amongst owners is the behaviour of trustees and the chairperson. The AGM gives owners the opportunity to nominate one or more persons as a trustee and to vote for the people of their choice for this very important function.

Once suitable trustees have been voted into office, there is opportunity at the AGM to direct or restrict their activities by making a proposal. For example, a proposal that a new managing agent be appointed.

Schaefer advises that while any owner can try to influence aspects of a management scheme, a single owner’s influence is limited. He says the best way to make sure your voice is heard is to lobby other owners before the AGM. “The more people who raise their voice on an issue, the more likely they are to make a permanent impression even if they are eventually outvoted.”

It is best to attend the meetings, make your voice heard and play a role in what is a very important financial and lifestyle asset to owners.

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To convert from a share block scheme to sectional title only requires 30 percent of the votes from owners, and after the decision to convert has been made, half the owners must support the resolution.

Hugh Jackson, director, for real estate at Cliffe Dekker Hofmeyr explains that the amendment of section 9(19) of the Transfer Duty Act, No 40 of 1949 is contained in section 1 of the Taxation Laws Amendment Act, No 22 of 2102.

Jackson says the exemption from payment of transfer duty in such circumstances was previously restricted to a natural person and only applied if the initial acquisition of the share was subject to duty in terms of the Transfer Duty Act.

“The exemption now applies in respect of any such transaction concluded on or after 1 January this year irrespective of whether the holder of the share is a natural or juristic person, and whether or not the transaction relating to the initial acquisition of the share was subject to payment of transfer duty at that time.”

He says the exemption is extended further to include the acquisition by any person of a part of the immovable property of the share block company where that person had a right of use of that part of the property that was conferred on him or her by reason of the ownership of a share held in the share block company.

According to Michael Bauer, general manager of IHFM, KwaZulu-Natal South Coast still has many apartment blocks run as share blocks (which was the popular development system used to manage blocks of flats in the 1970s and 1980s).

“Since IHFM opened its offices in Durban in March, we have become more aware of and surprised at how many of these share block schemes still exist in this area and have never been converted,” he says.

Share blocks can be complicated to run as they are classed as companies and each owner of a unit has shares on the company.

With effect from 1 January, 2013, transfer duty is no longer payable in respect of a transaction contemplated in Item 8 of Schedule 1 to the Share Blocks Control Act, No 59 of 1980, whereby a right to or interest in the use of immovable property conferred by virtue of the ownership of a share in a share block company is converted to ownership of the immovable property concerned.

The shares are usually allocated to different parts of the building, such as parking, gardens, the apartments, for example.

So, in owning those shares the owner has the exclusive use of the parts of the building he has shares in and the company, in this case, owns the immovable property.

The drawback of a share block is that the management, the directors, can make decisions without consulting any other shareholders in the block, and because the owners own shares and not the property, they can never use this as leverage to get finance on another investment.

“This is also to the potential buyer’s disadvantage because they cannot borrow 100 percent against shares, but would be able to get a 100 percent home loan against a section.”

Sectional title schemes are run by the body corporate, of which all owners are automatically members, so owners here have a say in the way the scheme is run.

They vote the trustees in who manage the scheme and can give directives at general meetings as to the way their scheme is run, he says.

Bauer says conversion to sectional title is usually recommended and it is done according to a schedule as outlined by the Share Blocks Control Act.

If this is to be done, the company must first draft the documents to show its members what the sectional title plan will be and what rules will apply.

To convert from a share block scheme to sectional title only requires 30 percent of the votes from owners, and after the decision to convert has been made, half the owners must support the resolution.

If there is still a bond on the property, the bondholder must also agree to the changeover, he points out.

Once the above has been done, a sectional title register is opened and the owners can take transfer of their units.

They now become owners of immovable property, instead of owners of shares in a company, which will then allow the owners to reap the benefits of owning their properties such as using it as collateral if they choose to buy another property as an investment.

“Owning your property is far preferable to owning shares in a company and the first benefit is the investment is owned outright and the second is the direct participation now afforded to the owner of the unit in his scheme,” he adds.

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It is interesting to see, particularly on the South Coast of KwaZulu Natal, just how many apartment blocks are still run as share blocks (which was the popular development system used to manage blocks of flats in the 1970s and 1980s), says Michael Bauer, general manager of IHFM, the property management company.

“Since IHFM opened its offices in Durban in March, we have become more aware of and surprised at how many of these share block schemes still exist in this area and have never been converted,” he said.

Share blocks can be complicated to run as they are classed as companies, said Bauer, and each owner of a unit has shares on the company. The shares are usually allocated to different parts of the building, i.e. parking, gardens, the apartments, etc. So, in owning those shares the owner has the exclusive use of the parts of the building he has shares in. The company, in this case, owns the immovable property.

The drawback of a share block is that the management, the directors, can make decisions without consulting any other shareholders in the block, said Bauer, and because the owners own shares and not the property, they can never use this as leverage to get finance on another investment.  This is also to the potential buyer’s disadvantage because they cannot borrow 100% against shares, but would be able to get a 100% home loan against a section.

Sectional title schemes are run by the body corporate, of which all owners are automatically members, so owners here have a say in the way the scheme is run. They vote the trustees in who manage the scheme and can give directives at general meetings as to the way their scheme is run.

Conversion to sectional title is usually recommended, says Bauer, and it is done according to a schedule as outlined by the Share Blocks Control Act. If this is to be done, the company must first draft the documents to show its members what the sectional title plan will be and what rules will apply. To convert from a share block scheme to sectional title only requires 30% of the votes from owners, and after the decision to convert has been made, half the owners must support the resolution. If there is still a bond on the property, the bondholder must also agree to the changeover.

Once the above has been done, a sectional title register is opened and the owners can take transfer of their units. They now become owners of immovable property, instead of owners of shares in a company, which will then allow the owners to reap the benefits of owning their properties such as using it as collateral if they choose to buy another property as an investment.

“Owning your property is far preferable to owning shares in a company,” said Bauer. “The first benefit is the investment is owned outright and the second is the direct participation now afforded to the owner of the unit in his scheme.”

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One particular case he was referring to was a sectional title scheme in Johannesburg where IHFM have been called in to assist with the management and financial salvage, which received a municipal account for electricity in the amount of R3.8 million.

In this particular case, the disconnection notice arrived only a few days before the electricity was cut off, and the building was left without electricity for over ten days.

“How the account was allowed to run up to this amount, no one knows,” he said.  “In most cases before the amount even gets to hundreds of thousands the municipality would have cut the electricity or water in order to get the overdue amounts paid.”

In cases such as these urgent help is needed to manage the crisis and the first step is to raise the money to pay the outstanding account or to arrange a repayment plan with the municipality to settle the amount over a certain period of time, he said.

All the trustees here were also replaced with new trustees who were willing to tackle the problem of the financial mismanagement of the scheme.

Another thing that needs to be done when overly large accounts are presented is to ascertain the actual amount outstanding and check whether the building has been overcharged in any way, said Bauer.  In this particular case, there were some inaccurate readings which were then credited.

The next step is to manage the reconnection and raise a special levy or finance to settle the outstanding account.  It might be necessary to implement a management system to keep the electricity bills in check.

The trustees need to work on a workable business plan to get the building back on track, where monthly or quarterly reports are generated to check on the finances regularly, he said.

Once the crisis has been averted, he said, the trustees will then need to work out what happened to the scheme’s funds and where the levies paid to the body corporate actually went.  It might be necessary to commission a forensic audit to work out whether funds were stolen or whether it was purely under-budgeting that left the scheme without enough cash to pay the bills each month.

“This shows just how important it is for owners to get involved and, either become trustees themselves, or to ask questions on the financial management of their scheme,” said Bauer.

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Where Propell have been called in to assist in levy collections at sectional title schemes, there are various reasons given for the non-payments, he said.

“Owners often fail to speak to the trustees if they have problems with paying their accounts. There are ways of arranging payment plans with the body corporate and it is always better to arrange this before the amount outstanding becomes unmanageable. Withholding levies is sometimes also used as a leverage tool if the owner is unhappy with something within the scheme, but this is not a solution to any problem, in fact, it just makes the animosity worse,” says le Roux.

A sectional title development which has levy collection problems will be unable to pay its creditors and keep the property maintenance up, which will eventually cause the property value to drop, and in turn, the owners’ investments will decrease in value.

“So, in not paying the levy account, it is a form of self-sabotage, withholding the payment for any reason does not make sense,” he says.

The body corporate, on discovering that levies are in arrears, will usually first send a reminder for non-payment of the levy account to the owner, but if he ignores this, a letter of demand will be sent. If this letter is ignored, it will be handed over to attorneys and this will end up in high legal costs and being listed as a bad payer on ITC.

If the levy account is handed over, the Sheriff will serve a summons or can pin the notice on the front door of the unit, which is legal as this would be the listed legal address of the owner of the account unless the body corporate has been notified in writing of a different address. The owner will have ten working days to respond to the summons and if he doesn’t the Sheriff can then attach goods or continue with the proceedings to auction off the unit itself (if the sale of the goods is not enough to cover the amount outstanding).

Owners who do not pay their levies must realise, says le Roux, that the trustees of the body corporate must use the full strength of the law to collect outstanding levies and they have a duty to the other owners to protect them and the value of their units.

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The next development in the pipeline for sectional title role players will be the passing of the Sectional Title Schemes Management Act and Ombudsman Act, which Constas believes should become effective within this year.

This is according to specialist sectional title attorney and director of BBM Attorneys, Marina Constas, who saysone of the new sectional title regulations specifies that a sectional title owner who has arrears levies may not serve as a trustee.

She says this is an issue they have been lobbying for, and it is heartening to see that it has finally been addressed. “It will ensure that trustees can now be relied on to hand over the debtors of the complex for legal action. In the past, a trustee who himself was in arrears, would loath to initiate legal action, as he would be implicated.”

The amendment to Annexure 8, Rule 7, states that the nomination or appointment of a trustee cannot be made if that trustee is in arrears with any contributions payable by him in respect of his section and his undivided share in common property. In addition, there can be no nomination or appointment if the individual has persisted in breaching conduct rules, despite written warning by the trustees or managing agents.

Constassays this will get especially interesting when an individual who has been nominated disputes that he is in arrears, or that he is in breach of conduct rules.

Also a potential problem situation is where a trustee is already in his position, and falls in arrears. “The latest amendment now says that if he is in arrears for more than 60 days with any levies or contributions payable by him, and he fails to bring such arrears up to date within seven days of being notified to do so, then he ceases to hold office.”

Another new amendment relates to a rule which has been deleted, Rule 31(4A), which catered for the temporary increase in the levy between the financial year end of the scheme and the annual general meeting, by allowing an escalation of 10 percent.

Constas explains that since this rule was deleted, there was a question mark hanging over what would replace it. The answer may lie in the insertion of Rule 31(4B) which says that the trustees may, from time to time, when necessary, make special levies upon the owners or call upon them to make special contributions in respect of all such expenses as are not included in the budget.

In other words, Constas says, you could utilise this new regulation to raise the levy during the interim period between financial year end and the annual general meeting.

She says an amendment has also been made to the regulation of the Deeds Registries Act which is relevant to sectional title. “Effective from 2 May 2013, this amendment stipulates that a fee of R500 will apply when any person seeks to resolve a dispute by applying to the Chief Registrar for an arbitrator.”

The next development in the pipeline for sectional title role players will be the passing of the Sectional Title Schemes Management Act and Ombudsman Act, which Constas believes should become effective within this year.

She says they are aware that a board has been constituted, and once the Ombudsman’s office has been set up, the Acts will be passed into law. Exciting times lie ahead, but only time will tell how the sectional title industry will be impacted, she says.

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With yet another recent electricity price increase, which is probably being felt by all, it is time for trustees of sectional title schemes or their managing agents to consider installing environmentally friendly systems to heat water and to save electricity in other areas, says Johann le Roux, executive director of Propell, who provide financing to bodies corporate and homeowners’ associations throughout South Africa.

Not only will installing such equipment as solar panels or heat pumps to heat water, LED lighting or lights with movement detectors for common areas and other energy saving devices, raise the value of units in the scheme, but this will help residents control their expenditure and save on electricity, he said.

Solar panels and heat pumps will save around 40% on the overall electricity bills and apart from these helping to save money they reduce the impact the development has on the environment. These energy saving systems usually pay for themselves within two to five years, after which the residents will continue to enjoy the reduction in their electricity bills each month.

This type of installation is usually listed as a special project and trustees or managing agents might have been putting off carrying out this exercise because of a lack of funds or the reluctance to raise a special levy to cover the costs.

“What many do not realise is that Propell offer project finance, particularly for large projects like this,” he said. “Everyone is feeling the need to save energy and money but if you live in a sectional title scheme it relies on getting everyone to agree to it and the management of the scheme implementing the project.”

The finance available through Propell will enable the scheme to fund the installation in full and in most cases the monthly saving on the municipal account could cover the repayment instalment each month, said le Roux.

Once the loan is repaid, the saving will help the body corporate’s cash flow and reduce the need for future increases in levies or the need to raise special levies for other projects (i.e. they will be able to “bank” the surplus and build up a reserve fund).

“Propell offer project finance to assist managing agents and trustees get the job done with minimum fuss and without having any of the trustees sign surety for the loan, which is often what would put people off applying for credit in the first place,” said le Roux. “The facility can remain in place indefinitely and will only incur costs when used. The managing agent is, therefore, able to do his job properly, which ultimately is to ensure the scheme is run efficiently.”

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Alec Geldenhuys, the attorney who represented the investor who brought the successful application, says you could have a case to have your body corporate placed under administration if you can prove that the trustees are reckless in handling your sectional title scheme’s finances.

You should be concerned if your trustees:

• refuse to give you information;
• are not transparent about how the scheme is being managed;
• are not holding trustee meetings;
• are abusing their managerial power;
• have redrafted financial statements to misrepresent the financial affairs of the body corporate;
• or have charged levies and/or appointed service providers in an irregular manner.

In the Cape Royale matter, there were four respondents: the body corporate; the chairman of the body corporate; a trustee of the body corporate; and an entity owned by the chairman and performing some of the functions of a managing agent. Judge Vincent Saldanha considered serious claims against the respondents. These claims include:

Lack of transparency

Andries Botha, a part-owner who brought the administration application, said a failure to comply with a request by a fellow owner for information proved that the trustees lacked transparency and were unwilling to deal openly with owners.

In January 2011, one of the owners lodged a request for access to information in terms of the Promotion of Access to Information Act. The request was lodged with the information officer at Clint Ridden & Associates (CRA), sectional title administrators appointed by the body corporate.

The owner asked for: an up-to-date list of unit holders; a list of units owned by the developer; a list of owners in arrears with their levies, and the amounts due; copies of the body corporate’s accounts and financial statements; proof that the developer was paying levies; copies of service provider contracts and invoices; copies of the body corporate’s utility bills; copies of income tax and VAT returns filed with the South African Revenue Service; and copies of the minutes and resolutions of trustee meetings.

In response to the request, the owner was asked to pay R1 600, which he did the same day, but he has yet to receive the information he requested.

Abuse of managerial power

The court heard that, at a trustee meeting held in January 2011, a resolution was passed that had farreaching consequences for the body corporate’s financial affairs and the liability of the developer to the body corporate. Paschal Phelan, the developer and the chairman of the body corporate, was the only trustee present at the meeting. Also present were Clint Ridden and Leigh Cullen of CRA.

The Sectional Titles Act states that a trustee meeting cannot be held if only one trustee is present. The requirement for a quorum is at least 50 percent of the trustees, or no fewer than two trustees.

Botha claimed that Phelan derived a direct benefit from this “invalid resolution”, because “enormous amounts” previously owed by Phelan, as the developer, to the body corporate were cleared and “the future liability in respect of the units held by the developer was reduced and/or removed”.

No trustee meetings

Botha claims that no formal trustee meetings were held for an entire year. In an affidavit, a former trustee said he was not informed of any trustee meetings during his year-long tenure.

In response, Phelan contended that meetings were held by email, although he did not produce copies of such emails in court.

Botha claims this is further proof that Phelan managed the body corporate “on his own, to his own benefit”.

The redrafting of audited financial statements

The respondents admitted to the court that the financial statements for 2009 and 2010 did not properly reflect the financial affairs of the body corporate, which necessitated a substantial review of the body corporate’s finances from its inception in 2008 and a redrafting of the statements for the 2009 and 2010 financial years.

Irregularities in charging of levies to the developer

According to amended management rule 73.8 of the body corporate: “(a) The developer shall not pay levies on any unsold or unoccupied residential unit for a period of 18 months after the formation of the body corporate. (b) If the result of the arrangement in (a) is that the residential component runs at a loss for the period, the developer will forthwith pay the body corporate any shortfall.”

The body corporate was formed in July 2008, and the 18-month period expired on January 1, 2010.

According to the minutes of the annual general meeting (AGM) relating to the 2009 financial year, “the developer was charged levies incorrectly in terms of the rules”.

The bulk of the arrear levies reflected in the financial statements arose as a result of the incorrect invoicing of levies to the developer’s units. Botha says this was done to understate the deficit by as much as R1.5 million.

Judge Saldanha found “There has not as yet been a proper and independently verified reconciliation of the levies for which the developer would have been responsible (if any) and whether an amount (if any) is owned by the developer in terms of rule 73.8.”

Irregularites relating to floor area and levy liability

The court heard that unit 904, which is occupied by the developer (Phelan), enjoys exclusive use of certain units, and that the body corporate had failed to hold Phelan fully accountable for levies. The respondents admitted that unit 904 “has not yet been registered in the Deeds Office”.

The irregular assingment of proxies to the managing agent

The respondents deny that the trustees appointed Phelan’s company, Cape Royale Luxury Residence (Pty) Ltd, as the scheme’s managing agent, despite the fact that the company was referred to as “the management company” in correspondence from CRA to the owners and in the annual financial statements.

The respondents claimed that the body corporate did not have “a formally appointed” managing agent, because “it was never necessary” to appoint one.

In his application, Botha referred to a letter sent to owners of units in the rental pool notifying them of an AGM. The letter informs them that, in terms of the rental pool agreement, they had each given power of attorney to Cape Royale Luxury Residence to vote on their behalf at all meetings of the body corporate, and to sign any documents required by the body corporate to put into effect any resolutions taken by it.

With such proxies, Phelan, in his various capacities, secured complete control over the body corporate, Botha says. Botha referred to the second AGM, in 2010, at which he tabled a motion to include “an outside” trustee. The motion was supported by two other owners. But the minutes record that: “As Mr Phelan represents 45 percent of the scheme as an owner and in excess of 80 percent when combining the proxies he holds for rental pool holders, the meeting accepted that the trustees he voted for would be the trustees for the ensuing year.”

The improper appointment of a service provider

Botha claims that Cape Royale Luxury Residence, of which Phelan is the sole director, collected or received money on behalf of the developer or body corporate, and is therefore required to be registered with the Estate Agency Affairs Board and to hold a fidelity fund certificate.

Cape Royale Luxury Residence admits to not having a fidelity fund certificate but “maintained its denial that it was the appointed managing agent”. The respondents claimed that CRA, which has a fidelity fund certificate, was responsible for collecting the levies.

Judge Saldanha says although Cape Royale Luxury Residence was not formally appointed as the scheme’s managing agent, “it carried out part of that function”. It “handled millions of rands” of the body corporate’s finances, “settling amounts owed to creditors of the body corporate directly from income in the rental pool”.

Source: Personal Finance

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Handing down judgment in the Western Cape High Court last week, Judge Vincent Saldanha placed Cape Royale Body Corporate under administration in terms of section 46 of the Sectional Titles Act and appointed Nolands Forensics as the administrator until May 30, 2014.

The application to place the body corporate under administration was brought by Andries Botha, who is a part owner of one of the residential units in the luxurious hotel in Green Point.

Botha’s unit and 81 others (out of a total of 127) are in a rental pool, in terms of which the owners enjoy limited rights of occupation for part of the year, while for the rest of the year their units are let to tourists and business people on a short-term basis. The net income is divided between those owners whose units are in the rental pool. An owner’s percentage of the total income is based on a formula and is paid after the deduction of the levy and the rental pool costs.

Botha claims the trustees are guilty of gross neglect and incompetence in the management of the body corporate’s financial and general affairs.

The first respondent in the matter was the body corporate; Paschal Phelan, the chairman of the body corporate, was the second respondent; trustee Bettina Heiberg was the third respondent; and Cape Royale Luxury Residence (Pty) Ltd was the fourth respondent in the matter.

In addition to chairing the body corporate, Phelan is the sole director of Cape Royale The Residence, the developer of the hotel, and the sole director of Cape Royale Luxury Residence, which performed some of the functions of a managing agent for the body corporate.

Judge Saldanha found that Botha had proved that Phelan and Heiberg have failed to carry out their fiduciary responsibilities to the body corporate. Phelan, in his capacity as the chairman of the body corporate, also failed to ensure that his interests – in the development company and in Cape Royale Luxury Residence – did not compromise or affect his financial duties to the body corporate, Judge Saldanha says.

In terms of the court order, the administrator will perform all the functions entrusted to the body corporate until May 30 next year. In addition, it will be empowered to:

• Collect and retain all body corporate documents;
• Operate a bank account in the name of the body corporate; and
• Institute legal proceedings on behalf of the body corporate.

When the administrator’s term expires, it must file a report to the High Court for its period of administration, as well as for the 2009, 2010, 2011 and 2012 financial years.

Judge Saldanha also ordered the administrator to draw up a proposal for the future financial administration of the body corporate.

The papers before the court included a letter from Standard Bank that rejected a prospective buyer’s application for a mortgage bond over a unit at Cape Royale because of “unsatisfactory financials”. The letter also listed “long-outstanding arrears, long-outstanding municipal payments and insufficient cash resources” as the bank’s reasons for rejecting the application.

Botha’s attorney, Alec Geldenhuys of Michalowsky Geldenhuys & Humphries, represents 27 owners, but brought the application in Botha’s name only.

Geldenhuys says the appointment of an independent third party to manage the scheme should be of comfort to members of the body corporate who are concerned about the security of their investment.

Source: Personal Finance

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